Lookers — Operations recovering despite audit delays

Lookers (LN: LOOK)

Last close As at 25/04/2024

74.70

−7.80 (−9.87%)

Market capitalisation

GBP279m

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Research: Industrials

Lookers — Operations recovering despite audit delays

Lookers’ shares remain suspended awaiting publication of the FY19 accounts. However, further extension of the audit scope means that expected completion before the end of August has again been deferred. Meanwhile, the company continues to trade as usual. Management has released a reasonably encouraging H120 update, which suggests that despite the legacy issues, the UK’s second largest automotive retailer has a reasonable chance of emerging into the market recovery later this year.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Industrials

Lookers

Operations recovering despite audit delays

H120 trading update

Automotive retail

24 August 2020

Price*

N/A

Market cap*

£82m

*Suspended at 21.0p on 1 July 2020

Adjusted net debt (£m) at 30 June 2020

13.5

Shares in issue

390.1m

Free float

83%

Code

LOOK

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

21.3

(56.8)

Rel (local)

3.5

19.8

(49.1)

52-week high/low

64.5p

11.0p

Business description

Lookers is vying to be the largest UK motor vehicle retailer, with its new car operations supported by the strength of used and aftersales activities. It now operates 155 franchises, representing 32 marques from 100 sites around the UK, with strong regional presences in Northern Ireland, Scotland, the South East and across northern England.

Next events

Q3 trading update

November 2020

Analyst

Andy Chambers

+44 (0)20 3681 2525

Lookers is a research client of Edison Investment Research Limited

Lookers’ shares remain suspended awaiting publication of the FY19 accounts. However, further extension of the audit scope means that expected completion before the end of August has again been deferred. Meanwhile, the company continues to trade as usual. Management has released a reasonably encouraging H120 update, which suggests that despite the legacy issues, the UK’s second largest automotive retailer has a reasonable chance of emerging into the market recovery later this year.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18**

4,879.5

50.0

9.95

4.08

N/A

N/A

12/19e

N/A

N/A

N/A

N/A

N/A

N/A

12/20e

N/A

N/A

N/A

N/A

N/A

N/A

12/21e

N/A

N/A

N/A

N/A

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **May be restated.

Further deferral of FY19 accounts publication

Lookers is yet to release its FY19 report, which is further delayed by an extended audit, with the shares remaining suspended. Management has provided no expected date for publication following the latest delay. Prior years look likely to be restated, which may be partially responsible for the extension to the scope of audit. The fraud investigation is concluded and should lead to FY19 non-cash charges for the original issue, with other amounts relating to additional issues that were uncovered. Lookers still expects to report an underlying profit before tax for FY19.

COVID-19 affected H120 appears resilient

On a brighter note, the company has updated on H120 operational trading, where it has performed creditably. Given the disruption caused by the 10-week COVID showroom closures in England and Wales (longer in Scotland) and consequent revenue declines and margin pressures, it expects to report a material loss before tax for the period. Management expects to report H120 revenues of around £1.6bn (H119: £2.6bn). Government reliefs, support from brand partners and internal mitigation actions did prevent a worse outcome. Lookers has seen an improving trading environment since reopening in early June. There are likely to be several non-underlying charges, mainly related to an additional 12 site closures and 1,400 redundancy programme already announced. Adjusted net debt (excludes leases) benefited from the focus on cash protection and fell to just c £13.5m at H120.

H220 recovery apparent, outlook remains uncertain

In July, Lookers recorded a 17% increase in new and used unit sales year-on-year compared to the 11% year-on-year increase in new car sales in the UK market. With trading across Aftersales also ahead of expectations, H220 has started well as pent-up demand is being released across the market. However, the outlook for the end of the year and into 2021 remains very uncertain, with further potential disruptions from COVID, including local lockdowns, possible supply-side shortages due to factory and supply chain issues, as well as higher unemployment and Brexit.

Main issues

Fraud investigation

Grant Thornton delivered its report on the fraud issues on 3 August 2020. As previously announced, the key outcomes are expected to be:

A non-cash charge of c £4m relating to FY19 with regard to the original investigation.

Other unquantified non-cash charges in FY19 for additional irregularities that were uncovered during the course of the investigation.

Restatement of prior year accounts for discrepancies found.

The aggregate non-cash charges applied to FY19 are still expected by the board to leave the company reporting an underlying profit before tax for FY19. Our last estimate was for £16m underlying PBT (published on 6 February 2020).

On 29 June 2020, an update was given that indicated cumulative total of around £15m of draft adjustments over and above the initial investigation that would apply to prior years up to and including FY19. These related to incorrect or inconsistent application of policies, processes and accounting standards.

Update on FY19 audit process

To some degree, those findings may have led to the extension of the scope of the audit announced on 20 August 2020, resulting in further work on the group’s corporate leasing and vehicle financing arrangements. As well as potentially affecting FY19, the additional work may require further restatement of prior year accounts. Management still expects FY19 to remain profitable at the underlying profit before tax level.

H120 trading

Highlights of H120 operational performance were as follows:

During lockdown showrooms were shut from 23 March until 1 June 2020 in England, 8 June 2020 in Northern Ireland and 29 June 2020 in Scotland.

Some aftersales activity was maintained to service vehicles for key workers.

Management expects the impact of lockdown to reduce H120 sales by around £1–1.6bn.

New car margins were also affected by reduced manufacturer volume bonus receipts, and used also saw margin pressure. Both were partially mitigated by cost savings and previous portfolio optimisation measures.

Support of £29m was received from the government Coronavirus Job Retention Scheme (CJRS), which will diminish from H220 until the end of October when the scheme ends.

Management expects to report a material underlying loss before tax for H120. There will be some additional non-underlying items in H120 as a result of the restructuring and optimisation initiatives.

H120 adjusted net debt (excluding leases of over £100m) was approximately £13.5m, which benefited from VAT payment deferral, business rates holiday and support from brand partners. The property portfolio remains in excess of £300m.

On 4 June 2020, the company announced further restructuring and portfolio optimisation measures. It identified 1,400 redundancies, which should leave a workforce of 6,700 (-22%) by the end of Q320, saving around £50m of annual employment costs. It also marked 12 additional sites for closure (including seven freehold), leaving the company with a portfolio of surplus property available for disposal worth around £30m.

June like-for-like new car sales in England outperform the UK new car market which was down 34.9%. Like-for-like used car unit sales in England recorded year-on-year growth

H220 prospects

The positive trend seen in markets during June accelerated further in July as pent-up demand from lockdown was released in all business segments (new and used car sales and aftersales) on top of the recovery in the normal flow of activity.

In July, the group delivered more than 14,000 new retail and used vehicles, 17.0% higher on a like-for-like basis than in July 2019, and against a UK new car market that was up 11.3% year-on-year. Aftersales also delivered year-on-year revenue growth, as deferred service and MOT activity started to flow through workshops in addition to normal scheduled and ad hoc work.

Underlying profit before tax was materially ahead of July 2019.

Management says that the positive momentum has continued into August, with encouraging new car order levels ahead of the registration plate change in September.

The ability of manufacturers to meet the higher demand levels may be an issue due to factory and supply chain disruptions, and the impact of higher UK unemployment levels is likely to be more apparent from Q420.

We would expect Lookers to recover much of the H120 underlying loss before tax although, as some support initiatives unwind, the net debt level improvement seen at H120 may reverse significantly.

Uncertain outlook for FY21

The SMMT latest forecast in July for UK new car registrations indicates an expected 26.9% increase to just under 2.04m units, some 12% below the 2019 level. A lack of confidence in public transport may provide some additional support, but further COVID-related disruptions in the form of local lockdowns or supply disruptions cannot be discounted. With Brexit and increased unemployment levels also remaining issues, prospects for 2021 remain very uncertain, although Lookers has cut its costs in anticipation of lower markets, which should allow a significant improvement in H121 profit performance.


General disclaimer and copyright

This report has been commissioned by Lookers and prepared and issued by Edison, in consideration of a fee payable by Lookers. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Lookers and prepared and issued by Edison, in consideration of a fee payable by Lookers. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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